Markets in Review: Stepping back to go forward

The final piece of next week’s GDP puzzle was revealed this week, with the private capital expenditure (CAPEX) numbers released on Thursday.

The bottom line is that private CAPEX took a step back in Q3, but looks likely to advance in FY19. This will mean a slight revision of Q3 2018 GDP, however it is still above trend at 0.6 per cent quarter-on-quarter (qoq), and 3.1 per cent year-on-year (yoy).

Stepping back

• The actual read saw a decline of 0.5 per cent qoq in Q3, which caused the annual growth rate to ease to -0.6 per cent yoy. This meant a fairly large miss on consensus, as the market had CAPEX expanding at a rate of 1 per cent qoq. However, the silver lining is that the previous quarter was revised up 1.3 per cent to 1.7 per cent yoy.

• When drilling down to the granular details, the reason for the decline becomes clear:
  
  • Buildings and structures fell 2.8 per cent qoq, and by 6.9 per cent yoy, which married up with Wednesday’s construction data.
  • This was offset by a significantly stronger machinery and equipment figure, which increased by 2.2 per cent qoq, and by 7.7 per cent yoy. Another positive is the fact machinery and equipment translate directly into next week's GDP figures.

Moving forward

The fourth estimate of FY19 CAPEX was highly encouraging, with the headline read coming in at $114.1 billion. This would represent a 4.4 per cent yoy increase over the equivalent estimate in FY18. The switch from the mining boom appears to finally be here.

• Mining sector forward estimates fell to $33 billion, a decrease of 1.1 per cent on last year’s read.
• Manufacturing forward estimates grew to $9.7 billion, an increase of 7.4 per cent against last year’s read.
• Forward estimates for other industries (non-mining) grew to $71 billion, an increase of 6.8 per cent on last year’s read.

The outlook for the non-mining component is strong, and this read doesn’t include Health and Education (nor public sector infrastructure), which would imply an even stronger final read.

This improvement in non-mining CAPEX intentions is consistent with the pick-up in actual non-mining CAPEX over the past year (~15 per cent yoy). It is also consistent with the view that non-mining sectors are picking up the slack left by the end of the mining boom, and is conducive to ongoing growth in CAPEX activity over the next couple of years in Australia.